Monthly Market Commentary – May 2020

Globally, the markets continue to price in a V-shaped global economic recovery. COVID-19 infection trends continue to improve, except for Russia, SA, Mexico and Brazil. Manufacturing numbers across most regions rebounded from April, apart from Japan, Taiwan and Korea. Non-manufacturing and services PMI data were also largely better in May. The unexpected rebound in the US payroll data also suggests a US economic recovery is underway. While Q2 GDP growth will still be deeply negative in most areas, confidence is building for the expected rebound in Q3 GDP growth rates. The US dollar continues to weaken and started a rotation to value and cyclical stocks. The jury is out on which shape the economic recovery will form and if COVID-19 will bring a second wave to challenge economic activity.

Infection rates are spiking in SA as the economy is opening up for those allowed to trade in Level 3. SA Inc stocks have rallied hard in the last 9 trading days, but we continue to expect price volatility as the uncertainty  of earnings growth and credit impairments will affect most SA Inc stock prices. Gold prices and gold stocks had a pullback and challenged resistance levels on Friday. These gold related prices have stabilised since.

SA Drivers

S&P cut SA rating further | Importancy High

S&P cut SA international credit rating further from BB to BB- (three notches below investment grade). There was a revised out-look from negative to stable as the downgrade was largely expected. Key points – low GDP growth (Covid lockdown), heavy unionisation in key sectors, expanding fiscal deficit (-13.3% of GDP), high debt to GDP (84% by 2023). Positives include the independence of the central bank and their support for the SA economy.

SA Petrol Price | Importancy Medium

The petrol price declined by a further R1.74/lt, 6 May. This is the lowest petrol price since September 2016 (R12.22/lt – Gauteng). This is a result of the slump in international oil prices driven by a lack of demand and limited storage capacity to accommodate high global production. Over the last 6 months the petrol price has declined by R4.08/lt, a reduction of 26.7% over the last 12 months. These price cuts will provide welcome relief for consumer and business sectors

SA interest cut once again | Importancy High

The SARB decided to cut the repo rate once again by a further 50bps to 3.75% in May. Rates were also reduced in March and April by 100bps each. There is scope for the SARB to cut rates even further given the global interest rate trends coupled with muted inflation expectations. That said, continued aggressive rate cuts would have a negative impact on the Rand. Market expectations are for another 25-50bp cut before the end of the year – Data dependent.

SA wins award for budget transparency | Importancy Low

SA and New Zealand were ranked top countries globally for budget transparency by the Open Budget Survey (OBS) in April. Since 2006 SA’s OBS score has never dropped below 86 out of 100 while the US has not exceeded 82. In 2019 the UK scored 70. Over the last 14 years the global average score has risen by 20%, improving from 41 to 49.


Asset Class Total Returns – ZAR

Global Drivers

Easing Lockdowns | Importancy Medium

The US began to relax their lockdown measures in May despite some states still showing increases in daily infections. In the UK, plans were announced towards the end of May to begin the gradual easing of the lockdown from June. Across Europe, countries have been tentatively opening their economies throughout the month. Japan’s soft lockdown is proving reasonably effective, with cases already falling.

EU “Next Gen” stimulus package| Importancy High

The EU unveiled a plan to borrow 750 billion euros to aid economic recovery. 500 billion euros will be made available in the form of grants and 250 billion euros in loans. Stock markets across Europe rallied strongly as this stimulus package was unveiled.  The financing will be provided to those countries with already high levels of debt, helping them avoid the need to go to external market to raise funds.

China’s return to normality | Importancy Medium

Both Manufacturing (+5%) and Industrial (+3.9%) Production showed year on year increases in April – the first positive numbers since December 2019. Composite PMI showed a slight increase to 47.6 in April from 46.7 in March, driven by increases in the Services sector. Data published in early June points to continued increases to PMI figures in May.

Social unrest | Importancy Low

Frustration surrounding lockdown measures, China’s ideological annexation of Hong Kong and the BLM movement have resulted in mass protests across the world in May. The direct economic impact of these protests will be relatively low, but the indirect effects could be profound. These protests could define, Capitalist-Sino geopolitics, US Elections and a “second wave” of COVID19 spread.

US unemployment | Importancy High

US unemployment jumped to a record high 14.7% in April and is expected to rise further in May. On a positive note, the increase in weekly jobless claims (new unemployment claimants) has been steadily falling since its peak in late March of 6.9 million but was still recorded at 2.1 million on the week ending 23rd May.


Asset Class Total Returns – USD

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